The pandemic and its effects on the economy have been difficult to anticipate, even for central banks. Fortunately, the surprise has been generally positive, with an economic recovery that has forced organizations such as the IMF, the World Bank and the OECD to repeatedly improve their prospects.
In this context, the ultra-expansive monetary policy is under observation, even more so when inflation has shown a generalized momentum around the globe. However, the conclusions that the authorities are reaching are different in the case of emerging and developed economies.
“There are two big trends right now”says Felipe Alarcón, an economist at Euroamerica. On the one hand, he argues that “advanced economies are likely to continue at full steam with their expansionary monetary policy. By that I mean the Fed, the European Central Bank and also the Bank of England, on which some thought it would toughen the tone, but in the end it was quite dovish (accommodative).
On the other hand, the national expert on monetary policy indicates that “the emerging world has been decoupling from the developed ones, because food and fuel inflation has hit it harder, because it has been a little more persistent.”
In the region, the first to take the step was Brazil, which on June 16 applied the third consecutive hike of 75 basis points (bp) to 4.25%. The central of Mexico follows in his footsteps, which last Thursday equaled the Brazilian rate after applying an increase of 25 bp.
“At this time, the Copom base scenario (the central bank committee) indicates that a normalization of the interest rate is appropriate for the level considered neutral. This adjustment is necessary to mitigate the spread of the current temporary shocks on inflation, “said the officials of the issuing entity of Brazil.
Meanwhile, the Mexicans argued their decision stating that “although the shocks that have affected inflation are expected to be transitory in nature, due to their diversity, magnitude and the extended horizon in which they have been affecting inflation, they may imply a risk for the price formation process ”.
In the same vein, Russia and Hungary have already raised rates, while the Czech Republic and South Korea have advanced that they have plans to move in the same direction, as did the Central Bank of Chile.
“Given the stronger economic projections supported by consumption and fiscal expansion, the Central now contemplates raising its benchmark interest rate to 0.75%, according to the minutes of its most recent monetary policy meeting. It has kept it at a technical minimum of 0.5% for more than a year but current conditions seem optimal to begin to normalize rates, ”says Esteban Polidura, Director of Consulting and Products for the Americas at Julius Baer.
This analysis is shared by Alberto Ramos, economist for Latin America at Goldman Sachs, who stated in a recent report that ”A 25 bp rate hike is likely at the MPC meeting on July 14, and we assess some probability (15% -20%) of a bolder 50 bp hike given the current very low level of the policy rate , which continually increases the fiscal stimulus ”.
All this occurs in a more or less shared analysis regarding the behavior of inflation in the post-pandemic era. According to Polidura “the main drivers of the increase are the depressed prices of the past year, the unleashing of repressed demand as the economy reopens, the unprecedented fiscal support for American households, the bottlenecks in the chains of supply induced by the pandemic, a restricted labor market and a speculative avalanche in some commodity prices ”.
In this scenario, it coincides with the generality of the analyzes that suggest that “none of these factors last in the long term” and that “most of the drivers of inflation should be transitory in a horizon of six to nine months”.
The difference between emerging and developed would go the other way. “The fiscal support component that we have in Chile, in the case of the United States, is dying out, therefore monetary policy continues to play a much more important role there,” says Sergio Lehman, chief economist at BCI.
Indeed, although US inflation climbed 5.2% year-on-year in May, a change in the interest rate still looks a long way off. “The Fed appears to be putting more weight on labor market outcomes than on faster inflation that the central bank considers largely transitory,” Says Sam Bullard, a senior economist at Wells Fargo, who maintains a rate hike forecast for 2023.
Although they also watch prices closely, the Bank of England is taking the same route as the Federal Reserve. “The committee expects the direct impact of increases in commodity prices on the CPI to be temporary,” the institution said last week, when it kept its monetary policy intact. “Taking into account data from financial markets, household and business surveys and professional forecasters, the Committee estimates that Britain’s inflation outlook remains well established,” they added.
With all these elements, the market makes a judgment that agrees with that of the analysts and in the perspectives collected by Bloomberg, it is the emerging ones that show a momentum of rate hike between this year and next, as in the case of Chile where they see that in 2022 it approaches 2%. Meanwhile, in the same period, the developed countries are seen with a rate similar to the current one.